Skip to contents
Experts and knowledge

The commercial real estate sector after COVID-19. Now what?

Despite the impact of Covid on commercial real estate investment in Spain, the fact that the crisis was short-lived gives us cause for optimism.
El sector inmobiliario comercial después del Covid
Experts and knowledge
Content type
Written by
Editorial Dept
Reading time
11 minutes
18 Oct 2021
Spain expects to see economic growth and GDP rise by more than 6% by the end of the year. The pandemic is receding and pressure on hospitals is expected to ease massively by the end of the year. All this, coupled with the relatively short duration of the current crisis compared to the previous one in 2008, is certainly cause for optimism within the sector, even though certain segments are faring better than others.

The COVID-19 pandemic has had a heavy impact on the commercial real estate sector, albeit an uneven one, largely due to the effect of the restrictions that governments have implemented to combat the pandemic, most notably the closure of non-essential activities. The office and hotel sectors have been the hardest hit. On the flip side, the residential sector, the logistics and data sector and the commercial retail sector have actually been aided by the new climate.

Prior to the pandemic, investment in the hotel sector, together with office space, accounted for almost 50% of the total. Amid the pandemic, investment plummeted to below 20%. The office segment, under siege from the rise of teleworking, has yet to get back on its feet. And the hotel sector was one of the hardest hit due to the collapse of the tourism industry, the closure of trade fairs and congresses and the cancellation of business travel, among other phenomena.

El sector inmobiliario comercial después del Covid

Green shoots now emerging

However, the mobility restrictions and the focus on what are known as "essential activities" shaped a landscape in which certain segments, notably supermarkets and logistics centres, actually benefited from the increase in online shopping. Yet within the retail sector, commercial premises on the front line were heavily affected by closures, limited opening hours and restrictions on the number of shoppers allowed into the stores and therefore took the brunt of the crisis.

Turning to the commercial residential segment, the outlook is more complex. First of all, nursing homes were directly impacted by the health crisis, with a large number of deaths and widespread distrust in their management. That said, nursing homes are now on the mend and the demographic outlook for the country all but guarantees their future. Meanwhile, halls of residence began to empty as the use of online classes became more widespread, allowing students to return to their homes. However, the gradual return to normal will bring students back to the halls in this new academic year. Commercial rentals turned in a positive performance thanks to the new build-to-rent approach, which is becoming increasingly popular.

Investment in the commercial residential segment is therefore expected to increase in the coming year and beyond. This is mainly because the supply of student residences, nursing homes and rental housing is still scarce in the Spanish market, while demand for each of these segments is steadily growing. Moreover, public-private partnerships in the realm of subsidised rental housing projects are expected to increase over the coming months, partly driven by the Next Generation recovery funds that Europe is injecting into the Spanish economy.

Algunos brotes verdes

Handicaps on the horizon

There are also certain handicaps we need to take into account... For example, in the rental market, the government is currently debating the merits of regulating rent through a price index, and while this approach now seems more distant (the State Housing Law is still under discussion), Catalonia, among other regions, is currently attempting something similar, albeit with negative results so far. For instance, in Madrid rental prices have dropped more and supply has increased more this year than in Barcelona even in the absence of such regulations; and in Berlin, after a whole year of applying a law similar to the Catalan one, the supply of rented housing has fallen by up to 25%.

It also bears repeating that the pandemic has wreaked absolute havoc on the Spanish labour and economic landscape. The number of companies that have closed, those that have downsized, the number of jobs destroyed, the loss of household purchasing power and the extreme difficulties faced by young people in finding a job are more than just temporary problems in our society and will certainly slow down and hinder the recovery.

Immediate challenges

Against this backdrop, the real estate sector, especially the commercial, housing and hotel segments, must seriously rethink its business model and become more flexible and agile if it is to cope with this unprecedented situation and meet the needs of consumers who are changing their habits:

  • Widespread increase in online work: a trend that was already emerging before the pandemic, but which the crisis has boosted on a global scale. Many companies are rethinking their office investments and switching to technology or mixed solutions such as coworking or flexible office space. This trend will not only affect the number of offices but also push down office rents.
  • Explosion of e-commerce: another trend that was already well established before the pandemic, but has been given a definite boost by it. The retail sector is already adapting in leaps and bounds, and the need for large logistics spaces with advanced technological solutions will continue to grow. Yet there will also be increased demand for smaller "last mile" spaces for the distribution of goods, meaning those located close to the end consumers.
  • Increased rental demand: economic uncertainty, high unemployment and labour mobility are factors likely to affect home buying decisions, which will be put off in favour of rental solutions.
  • New players in sight: new segments are joining the fray, closely related to technological development and fields that have so far been largely unexplored by the real estate sector.
    We are talking about assets that digitalisation, the expansion of 5G, fibre optics, cloud computing and the internet of things will put firmly in the firing line of demand: data centres, communication towers, renewable energy plants, etc.
  • Sustainability in the sense of ESG (environmental, social and governance): pressing issues such as energy efficiency, ecological footprint, emissions reduction and the social problems to have emerged from the pandemic have all led to a trend towards sustainable real estate investments that have a positive impact on society.

A segment full of unknowns: office space

Un caso lleno de incógnitas: las oficinas

Perhaps the largest and most uncertain segment of the commercial real estate sector is the office segment. We have already seen how the lock-down and the growing trend towards online work among the population have had a dramatic effect on demand for office space. In 2020, office rental demand fell by 42% in Madrid and 64% in Barcelona. However, the long-term outlook for the market is not as clear-cut as it might seem. In the Spanish office market, demand outpaced supply, and both may simply adjust in the medium term.

The impact of telework, which in Spain had one of the lowest penetrations in Europe, is the decisive factor here. However, older properties will fare worse than modern, high quality and flexible buildings that can easily adapt to new technological and space allocation needs. Issues such as employee health and well-being, new hybrid working models, digitisation capabilities and the sustainability of real estate assets are now a key priority and will be in high demand.

Meanwhile, iconic or landmark buildings and prestigious office space will continue to be sought after by companies: the positive brand image they convey will continue to be highly valued when it comes to hosting customers, partners and business events. In fact, investors are already showing a preference for prime areas in Madrid and other capital cities as opposed to new business areas lying further out from the centre.

In any case, offices will need to have sufficient space over the coming years to cope with peak employee attendance during the week; and as and when minimum social distancing between employees increases, each employee will need more square metres for individual use and open-plan spaces —both for collaborative work and amenities— will become even more the norm. Let's just say that "everything will take up more space".

On this point, the new trend of "flexible office space", meaning dynamic business space that can be adapted at any time to the needs of each company, is extremely interesting. This flexibility lies both in the location of the office space and in the fact that it can be used and shared by different companies or activities. In addition, many companies are now offering their employees the possibility to work from so-called "third space", meaning office space located within walking distance of the employee's home.

Reasons for optimism

Moreover, aid flowing into Spain from the Next Generation EU fund will multiply the desired impact on investment, financing and economic growth.

Unlike the previous financial crisis in 2008, governments and other authorities have responded in kind to this crisis by making large bond placements and designing an accommodative fiscal policy to support the sector. And early indicators show that the real estate sector is one of the main drivers of the economic recovery in Spain.

In conclusion, the commercial real estate sector in Spain will remain a complex yet exciting place for investors over the coming months and indeed years, raising many challenges while offering many opportunities. The sector is reinventing itself, adapting and finding new paths to take and once this crisis is truly over we expect to see a much more satisfactory recovery and a new-look sector.

Razones para el optimismo